Weekly Musings – CME Fedwatch change for week to February 16, 2024

19 Feb 2024 , 09:30 AM

US INFLATION DATA MAY PUT OFF RATE CUT HOPES

In the latest week to February 16, 2024, the US Bureau of Labour Statistics (BLS) published the CPI inflation based on consumer prices. At 3.1%, the consumer inflation for January was a full 30 bps lower than January 2024. But that was hardly a reason for the markets to be gleeful. Firstly, the markets were expecting the consumer inflation to be closer to 2.9%. That means; the actual inflation was a good 20 bps above the street estimates, which can be deemed to be hawkish. Also, the markets were disappointed that the core inflation was flat while the food inflation in January fell by just about 10 bps. The markets were expecting a sharper fall in both these variables. What is means is that the last mile inflation movement to 4% could be much tougher than anticipated. It could also mean that the Fed may prefer to wait for longer at higher levels before moving on its rate cut program.

ALL EYES WILL BE ON THE FED MINUTES THIS WEEK

The minutes of the Fed policy statement, announced on January 31, 2024; will be made available this week on Thursday. The Fed minutes offers details of the debate so it gives an idea of how many of the members of the FOMC are veering towards early rate cuts. Also, the dot plot provided by the members of the FOMC will provide the first glimpse on when the rate cuts are likely to commence in this year. With the Fed already having ruled out rate cuts in March, the next hope is that the Fed would cut rates, either in the May policy statement or the June statement. However, a lot will depend on how PCE inflation comes in and there are concerns that the PCE inflation for January may be higher than the December 2023 inflation level of 2.6%. However, for now, the key takeaway from the minutes will be whether the FOME is really willing to throw some definitive hints own when it plans to start the rate cut program. The earlier, the better for markets.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED FEBRUARY 09, 2024

The week to February 09, 2024 did not have any real data points and the CME Fedwatch movement was largely based on the speeches made by the Fed members and the trajectory of the US bond yields and the dollar index. In the last few weeks, the CME Fedwatch has veered sharply towards the Fed view point. While the dichotomy is still there, the CME Fedwatch appears to have reconciled to the reality of just about 100 bps of rate cuts in the current calendar year and a more aggressive stance in 2025. For now, the only hint that has come from the Fed is that rate cuts are off the table in March and the first rate cuts would only happen around May or June 2024. 

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	16.0%	84.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	8.5%	52.2%	39.3%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	6.8%	43.5%	41.9%	7.8%
Jul-24	Nil	Nil	Nil	Nil	Nil	5.5%	36.4%	42.2%	14.4%	1.5%
Sep-24	Nil	Nil	Nil	Nil	4.7%	32.%	41.4%	18.3%	3.3%	0.2%
Nov-24	Nil	Nil	Nil	2.7%	20.2%	37.4%	28.3%	9.8%	1.6%	0.1%
Dec-24	Nil	Nil	1.9%	14.9%	32.1%	31.1%	15.5%	4.1%	0.5%	Nil
Jan-25	Nil	1.2%	9.9%	25.5%	31.5%	21.4%	8.4%	1.9%	0.2%	Nil
Mar-25	0.5%	4.6%	16.1%	27.9%	27.5%	16.3%	5.9%	1.2%	0.1%	Nil
Apr-25	3.4%	11.8%	23.5%	27.6%	20.5%	9.7%	3.0%	0.5%	0.1%	Nil

Data source: CME Fedwatch

There were 4 data triggers in the week to February 09, 2024 with reference to CME Fedwatch. 

• Fed chair Jerome Powell spoke, in his address, was emphatic that the last mile attack on inflation was going to much harder. Another hawk, Michelle Bowman, continued to give a cautionary outlook. During the week, even a known dove like Neil Kashkari (a long-time proponent of rate cuts), also give a hawkish outlook due to the Red Sea crisis. 

   

• The API weekly crude stocks saw positive growth, but the growth was lower than expected. In the prior week, oil stocks had depleted by -2.500 Million barrels. In the week to February 09, 2024, oil inventory accretion of 2.133 Million barrels was estimated, but it ended with subdued accretion of just 0.674 Million barrels.

   

• The positive surprise in the week came from the weekly estimate of Atlanta Fed GDP at 4.2%. This week, the Q1-2024 GDP was expected to hold 4.2%, but it came in lower at 3.4%. Data is still volatile, but the sharp fall in consumer credit in the week could be a key factor driving lower growth expectations. For now, we have to await the second and third estimates of fourth quarter GDP expected in the end of February and March 2024.

   

• The Fed balance sheet has gradually come down to $7.63 Trillion from a peak of $9.1 Trillion. However, this week there was no taper. While we await the final word from the Fed, it could be due to the evolving situation in the Red Sea crisis.

The week to February 09, 2024 largely saw the lag effect of relatively hawkish FOMC policy statement delivered on the last day of January. It is now over to the data points.

CME FEDWATCH IN THE WEEK TO FEBRUARY 16, 2024

The recent week to February 16, 2024 was all about the CPI inflation announcement. The table captures the Fed Futures probabilities over the next 10 meetings of the Federal Open Markets Committee (FOMC). The expectation is 75-100 bps rate cut by December 2024 and a total of 100 to 125 bps by April 2025. That almost matches with the Fed viewpoint.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	10.0%	90.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	3.2%	35.2%	61.6%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	2.2%	25.7%	53.7%	18.4%
Jul-24	Nil	Nil	Nil	Nil	Nil	1.6%	18.7%	45.4%	28.9%	5.5%
Sep-24	Nil	Nil	Nil	Nil	1.2%	14.9%	39.5%	32.5%	10.6%	1.2%
Nov-24	Nil	Nil	Nil	0.7%	8.7%	28.4%	35.7%	20.5%	5.4%	0.5%
Dec-24	Nil	Nil	0.5%	6.6%	23.2%	33.7%	24.5%	9.5%	1.9%	0.1%
Jan-25	Nil	0.3%	4.1%	16.5%	29.5%	28.2%	15.5%	4.9%	0.8%	0.1%
Mar-25	0.1%	1.9%	9.2%	21.9%	29.0%	23.0%	11.1%	3.2%	0.5%	Nil
Apr-25	1.7%	6.5%	17.2%	26.3%	25.2%	15.6%	6.2%	1.5%	0.2%	Nil

Data source: CME Fedwatch

There were 4 critical triggers in the week to February 16, 2024 with reference to CME Fedwatch. Consumer inflation was the big data point.

• The US consumer inflation for January 2024 came in at 3.1%. While it was lower than the December 2023 reading of 3.4%, it was higher than the Bloomberg consensus estimate of 2.9%. That has raised the likelihood of the Fed waiting longer on rate cuts, even beyond May and June, to ensure that last mile inflation is handled effectively.

   

• The Federal budget deficit for January was announced on Monday. The budget deficit for the month came in at $22.0 Billion, lower than the street estimates of $39 Billion. This was one of the factors that also helped the dollar to harden in the week.

   

• The industrial production growth in sequential terms and yoy terms will be announced next week. Both were expected to surprise on the upside. However, while YOY IIP was in line with expectations, MOM IIP came in at -0.1%, against expectation of +0.2%.

   

• The week had its share of important views coming from Fed governors; Waller, Bowman, and Kashkari. The underlying theme was still cautious, with a virtual refusal to commit on any rate cut time table.

The consumer inflation was the big story in the week, and it disappointed as it came in about 20 bps higher than the street expectation. With the Red Sea crisis, any bounce in inflation can get magnified and that could make the Fed more cautious.

TRIGGERS FOR CME FEDWATCH IN COMING WEEK TO FEBRUARY 23, 2024

There are 3 critical triggers to watch out for in the coming week to February 23, 2024 with reference to CME Fedwatch. The big trigger will be the Fed minutes publication.

• The Fed will publish its FOMC minutes in the coming week layout out the dot plot chart of individual expectations and the detailed debate points of the various members. That will give an idea on two fronts. Firstly, on which way the majority of the members are leaning and secondly on when the Fed is likely to announce a time table for rate cuts.

   

• The API (American Petroleum Institute) will be putting out its crude inventory estimates for the week. Last week, the crude stocks inventory spiked by 8.520 Million barrels and that kept a lid on crude prices. Crude stocks are likely to increase further this week.

   

• All eyes will be on the Fed balance sheet. It has remained static at around $7.63 Billion for the last 2 weeks as the Fed wanted to avoid a liquidity shortfall in the system and the Fed taper was paused to keep the liquidity comfortable. The tapering of the balance sheet is critical as it magnifies hawkishness, even in the absence of rate hikes.

   

• The week will also have its share of important views coming from the Fed governors like Waller, Bowman, and Bostic. However, the tone is still expected to be very cautious as the Fed would be awaiting indications and signals that the inflation reading was truly and genuinely trending towards the 2% target. 

The Fed minutes will be the big story 

CME FEDWATCH VS FED STANCE: GAP IS ALMOST GONE

Last week, the CME Fedwatch further cut its estimate of rate cuts from 175 bps in 2024 to just 100-125 bps in 2024. This week after the US CPI inflation data, the CME Fedwatch has further cut its estimates for 2024 rate cuts to the range of 75 bps to 100 bps. That is absolutely at par with what the Fed has already stated in its trajectory. There are 2 key takeaways in terms of the divergence between CME Fedwatch and the official Fed stance.

• On the upside, there appears to be a consensus between the Fed and the CME Fedwatch on rates trajectory. Even the Fed is now agreeable to the view that the rates have topped out around current levels of 5.25%-5.50%. However, the Fed is yet to officially acknowledge the same. One thing is clear; additional rate hikes will only happen under exceptional circumstances. Even in a tough scenario, the first preference for the Fed would be to hold rates higher for longer rather than hiking rates. This is one area where the Fed and CME Fedwatch are in sync.

   

• The dichotomy is on the downside, but that dichotomy almost reduced to zero this week. The aggression of the CME Fedwatch had been consistently toning down in the last few weeks. The Fed had originally reconciled to 3 rate cuts in 2024 and 4 rate cuts in 2025, although it has been non-committal about the time table for rate cuts. The CME Fedwatch started off pegging that the full 175 bps rate cuts would happen in 2024 itself. After the higher than expected CPI inflation at 3.1%, the CME Fedwatch is pegging 75 bps to 100 bps rate cut by December 2024 and 100 bps to 125 bps by April 2025.

It was always clear that the Fed would be data driven and would even prefer to err on the side of caution. For now, Fed has a number of aces up its sleeve, but the market is ambivalent about the trajectory of rate cuts, if at all. Fed wanted to prove a point that; it will not allow market pressures to force its hand. That is something, the Fed has managed to do. For the Fed, it is still price stability and full employment that sacrosanct and central to its policy approach; and GDP growth does not figure in that list. CME Fedwatch has finally veered around to the official stand!